The General Assembly is currently on Easter Break, and when it returns, it will address several issues important to the business community. Below are a few issues to keep an eye on.

In regards to the budget:

The most recent DEFAC report shows an increase of $101 million over this fiscal year and next over previous predictions.

The increases are primarily composed of increases to PIT (federal tax law having impact), and fewer abandoned property returns (based on higher level of scrutiny of applicants). Note that money is already earmarked for expenses, but the timing is pushed out. These are not things on which to base a budget.

IRS guidelines on repatriation of overseas profits and how states will divvy up those taxes remain to be written. The hope is that Delaware will receive some of that money, but caution that it will most likely be one-time money.

Labor Relations:

Sexual Harassment — rewriting who is covered, including independent contractors. This legislation would require all employees receive DEDOL created literature related to sexual harassment to be kept in their employee file; and employers with over 50 employees to provide two hours of sexual harassment training.

Predictive scheduling — Industries like food, hospitality, retail would be required to set two-week schedules, with penalties for changing schedules without two weeks' notice to the employee and if employees arrive 30 minutes before/after their scheduled block. Employees would have to be paid if sent home early. Employers could have a pool of employees who can be called in emergency, but the employees would be able to decline.

This week’s legislative work was cut short a day to due weather. Bills that were to be heard in committee will be heard in the coming weeks. Of note, on Tuesday the Senate defeated SB10, which, as amended, would have raised the minimum wage by $1.00 over two years. It is expected that after work is completed providing casinos tax relief, the minimum wage bill will be reintroduced and voted on. Stay tuned.

In other news, DEFAC met earlier in the week and added $101 million in additional revenues for FY2018 and projected 2019. It is rumored that in the next meetings that number could grow even larger. This means a new round of budget fights this year—only this time on how to spend this windfall.

It is worth noting, however, that the two primary increases came from personal income tax (PIT), and fewer claims on abandoned property. The abandoned property money is already earmarked for returns, no matter the pace, and is not what you base a budget around. As PIT has increased from the federal GOP tax plan, corporate taxes (CIT) have declined. One bright side is that Delaware may be due a onetime windfall as companies bring back money parked overseas to take advantage of the lowered US corporate tax rate. The IRS is still working to publish guidelines on how this tax money will reach the states. More to come.

Coming off a year when Delaware manufacturing jobs rose by almost one-half percent to about 26,000 workers, jobs growth in 2018 is expected to be similarly modest. According to local manufacturers and those who work in manufacturing-related organizations, three major trends will dominate the sector in the coming year:

Job growth will largely be organicMost job growth will occur within businesses currently located within the state, with little expectations of immediate major manufacturing relocations to the region.

“One of the challenges we have at the Delaware Manufacturing Association is to reach out to growing companies in the state,” said Neil Nicastro, plant manager at PPG Industries’ Dover facility and a leader in the organization. “We try to get these companies in to discuss the challenges to growth they face, and we have seven sub-groups, such as health, advocacy and energy issues, to help in these areas.”

However, long-term growth may involve the relocation of heavier industries into the region, which was part of the rationale for the state changing some provisions of the Coastal Zone Act, to be more attractive for large manufactures to relocate here. Additionally, there are now recently abandoned locations available between Wilmington and the Pennsylvania border.

“I was very impressed when I recently visited the Navy Ship Yard in Philadelphia, and saw what they were doing,” Nicastro said of the 1,200-acre business campus, which is home to more than 12,000 employees and 152 companies. “I can’t help but think we can do something similar in Delaware.”

Programming and robotics part of trainingMost of the jobs and job training will be concentrated on what is called “advance manufacturing” instead of traditional manufacturing skills.

“No employer is using the same machinery they were using 30 years ago,” said Rich Heffron, head of the Delaware State Chamber of Commerce, which means that new workers need to be trained in skills such as computer programming and robotics.

“The challenge is to find trained employees to replace older workers who are retiring,” Nicastro added.Nicastro also thinks it’s important for young people to change their idea of manufacturing as a “dark and dirty” place, and he even invites parents to accompany their teens during career events at the PPG plant during the annual National Manufacturing Week.

Soft skills just as importantEmployers are increasingly demanding that young potential workers be trained in “soft skills” as well as technical skills.

“We did a survey of state manufacturers to ask what job skills they are currently looking for,” said Paul Morris, head of workforce training at Delaware Technical Community College, “and we were surprised that about 90 percent said they needed better ‘soft’ skills, such as being skilled in leadership, teamwork and problem-solving.”

Nicastro added that some newly hired young employees have little understanding of workplace practices, even about work scheduling, being surprised that “they’re going to have to work a 40-hour week. What we really need is for more companies to provide job internships for training.”

Finally, while recent federal cuts in corporate tax rates may spur growth, James Butkiewicz, professor and chair of the Department of Economics at the University of Delaware, warned, “My concern is that the tax plan increases the fiscal deficit. This will appreciate the dollar and worsen our trade deficit, and this could hurt manufacturing and agriculture.”

Since 2002 Delaware had been ranked #1 in The Institute for Legal Reform’s Harris Poll Lawsuit Climate Survey. This year’s survey finds Delaware dropping to #11.

According to the report, “Participants in the survey were comprised of a national sample of 1,321 in-house general counsel, senior litigators or attorneys, and other senior executives at companies with at least $100 million in annual revenue who indicated they: (1) are knowledgeable about litigation matters; and (2) have firsthand, recent litigation experience in each state they evaluate.”

While Delaware still scores high in key element categories of scientific and technical evidence, trial judges' competence, quality of appellate review, and enforcing meaningful venue requirements, it fell significantly in Treatment of Class Action Suits and Mass Consolidation Suits (from #1 to #26) and Trial Judges’ Impartiality (down to #15).

When I asked about specifics that were factors in Delaware’s drop, I was given a handful of recent court decisions and specific pieces of legislation passed by the General Assembly. From my perspective, no one decision or bill by itself precipitated the drop, instead the reasons for the decline seem to be a shift away from supporting what made Delaware a top corporate legal environment for so long. In fact, even though Delaware scored #1 in 2015, I was given warnings then about a potential slide in rankings if Delaware continued to focus on legislation and issued court decisions that were increasingly plaintiff friendly.

I’ve written about these issues before, and seemingly often, which include Delaware’s approach to abandoned property, the fee shifting debate that took place a few years ago resulting in the passage of SB75 that reversed the “loser pays” model of litigation, and the ATP Tours, Inc. v. Deutscher Tennis Bund decision that precipitated SB75.

In fact, over the last few years, Delaware’s cache has dropped when reviewed by other organizations as well. For example:

Forbes ranked Delaware 22nd among the states in 2016. The ranking lauded the state’s positive economic outlook, as shown by its increase in jobs and its business-friendly corporate law. Forbes’ cited Delaware’s low business costs and strong labor supply among its most positive factors, but gave Delaware poor marks for its quality of life, regulatory environment, and economic climate. This year marks a continued fall on the Forbes rankings from 11th in 2014 and 17th in 2015.

Delaware also fell in CNBC’s “America’s Top States for Business” rankings. Delaware ranked 40th in 2017, its lowest score in recent years. It placed 37th in 2016, 38th in 2015, and 38th in 2014. Once viewed by CNBC as first in the nation for its business friendliness, Delaware came in 22nd in that category. The state’s greatest challenges are its high cost of living, education system, high cost of doing business, and lack of infrastructure. Its greatest drops from 2016, however, were in the areas of its economy (26th to 39th), quality of life (28th to 37th) and business friendliness (11th to 22nd).

Chief Executive’s annual survey of CEO’s ranked Delaware 16th in 2017, a slight drop from the prior year. CEOs praised Delaware for public-private partnerships and new science-based businesses. Delaware placed 23rd in 2014, 20th in 2015, and 13th in 2016.

Delaware’s business tax climate ranks 19th among states in 2017, according to the Tax Foundation. This is a 5-point fall from 14th place in 2016 and its lowest score in recent years.

U.S. News & World Report’s 2017 “Best States” report ranked Delaware’s economy 9th, including 7th for business environment, 8th for growth, and 18th for employment. The state’s overall rank was 20th. This year is the first time U.S. News has ranked states.

The fact remains that the constant drip of decisions and legislation designed to support plaintiffs over business has led directly to where Delaware is today: a world where South Dakota is ranked as having the top business legal climate, and where Delaware is on the decline according to recent national ratings. ​One thing remains constant, however. If Delaware continues its current trend, our image will continue to suffer. Delaware relies on the billion dollars in revenue it receives each year from companies choosing to incorporate here. We should be doing what it takes to retain our corporate image if there is to be any realistic expectation of that being the case in the future.

The impact of the 2016 Election Day results will continue to resonate for the remainder of the year. Above and beyond the obvious implications of Republican Executive and Legislative branches federally, here at home, Delaware has a Senate where a special election in early spring 2017 will dictate which party has control for the remainder of the 149th General Assembly.

The pressing issues, however, remain. A major budget gap expected to be somewhere north of $300 million. An education system in need of reform in order to adequately prepare students for a career. A number of abandoned industrial sites currently sitting vacant, with limited prospects of seeing repurpose into economic development. An aging infrastructure system lacking dedicated funding to maintain, let alone expand, including road, rail, and clean water.

The good news is that I believe that our elected officials in Dover have the ability to make the difficult decisions necessary to help set Delaware on a course of growth. If we take nothing else from this election season, I believe that citizens expect to be engaged by their elected officials to outline the important issues and challenges we face. By doing so, our elected officials will find they are given a large measure of leeway to act in the interests of their constituents by making what are admittedly tough choices. Examples can be seen in Wisconsin, Michigan, West Virginia and other states where sitting by no longer remained an option for their respective legislatures.

The problems Delaware face are no different than our surrounding states, or many across the country. It is our size and ability to work together to tackle big problems that set us apart. It is my sincere hope that the next General Assembly and Governor work together, and by doing so continue to be an example to other states.

Although the dog days of summer are upon us, there have been some items of interest the last few weeks.The decision by PJM to review the Artificial Island project for both scope and cost was welcome news. Faced with political and public relations backlash, along with a pending FERC plan review, it was a wise move by PJM to step back and reevaluate. We are hopeful come February 2017 there will be a better, more fairly equitable, plan put forward.

Conversely in unwelcome news, abandoned property was in the headlines again–this time with the State settling the Temple-Inland case, with further potential ramifications on the horizon. We now wait and see how many companies currently under audit choose not to settle, or how many who have settled under a flawed system, choose to attempt to sue to recoup money given to the state. In addition, there’s the remaining contracted years with Kelmar Associates, the auditing firm behind the huge uptick in revenue these last few years, and the pending case at the Supreme Court brought by 21 states challenging Delaware’s escheat process. The state faces a significant reduction in revenues next year as a result, with no clear path to replace them.​And finally, Delaware’s Chancery Court was in the news related to TransPerfect and the decision to prepare the company for sale. It’s important to note that the Court, and the corporate bar community, have been the gold standard for corporate law for decades, making Delaware internationally known, and respected, as a result. It’s always news when a controversial case is decided, and the hubbub surrounding this decision is no different. It bears remembering, however, that shareholder disputes are settled all the time.All in all, a fairly exciting few weeks for summertime.

The Delaware State Chamber of Commerce, along with others in the business community, have urged modernizing the Coastal Zone Act (CZA) in order to spur the next generation of economic growth in Delaware. The focus of modernization has been solely on existing industrial sites sitting abandoned or underutilized where redevelopment of the property is hindered by Delaware specific restrictions created by the Coastal Zone Act. Recognizing that any effort towards modernization will involve community education that process has begun at the State Chamber and will continue in the coming months.

It may come as a surprise that Delaware has lost over 1000 jobs from companies located in the Coastal Zone in the last few years. Between the closure of the Evraz steel plant site and reductions at the Edgemoor TiO2 facility Delaware has lost quality jobs proving difficult to replace. Much of that difficulty stems from Coastal Zone Act regulations that serve as a barrier for companies interested in purchasing and redeveloping property in this state. One has to look no further than across the state line into Marcus Hook to see how Sunoco’s $2.5 billion expansion is providing quality jobs, yet the 44 acres sited in Delaware have seen no redevelopment, in large part due to the CZA.

With the focus on job growth, what sometimes gets lost in the discussion is what happens if businesses with operations in the Coastal Zone continue to either leave the state or continue to choose not to locate here? Who is responsible for maintaining containment of mobile contaminations? What will be the cost to DNREC, DEDO, and Delaware taxpayers for continued involvement in these properties over the long-term?

There exists a case study for these questions in the former Syntech site in Newark. Between 1981 and 1987, Helix Associates operated a specialty chemicals manufacturing and processing facility which reportedly recovered iodine from waste sulfuric acid solutions. In 1986, an explosion in a 750-gallon reactor vessel destroyed a portion of the manufacturing building and eventually led to closure of the Helix facility. In July 1989, Synthesis Technologies, Inc. (Syntech) began operations by manufacturing specialty batch diazo compounds, including dyes for cloth, color photography, 4 and biological tissue staining until its closing in February 1991. In 1990, a reactor leaked vapors containing heptanes and nitric acid into the outside atmosphere. As a result of releases of hazardous substances, groundwater has been contaminated. The site is awaiting redevelopment, but as of now no plans have been filed to do so.

The State of Delaware now owns that site, and others like it, in and around the Coastal Zone, forcing continued investment in environmental monitoring and potential remediation. The plan is that modernizing the CZA for redevelopment will result in jobs for Delawareans with the additional benefit of reducing the financial impact of monitoring these sites, but we aren’t there yet.​As the State Chamber has said before, we believe the role of the CZA was not to have industrial sites in the zone wither and die or to handcuff existing facilities by creating barriers that result in limiting expansion or improvement. It is only through modernizing the Coastal Zone Act in industrial areas to make Delaware more competitive and attractive for redevelopment that jobs and investment will flow. The alternative, to make no changes to the Act, will insure that there will be an increase in abandoned or underutilized sites resulting in fewer jobs for Delawareans and will cripple the state’s long-term economic growth.

​Quite simply, we focus our core initiatives to address the concerns of the entire business community.The Delaware State Chamber of Commerce is the preeminent statewide business organization promoting a strong business climate in Delaware. We strive to create a statewide economic climate that enables all businesses to become more competitive. Our team consistently meets with Delaware’s Congressional delegation and plays a leading role on issues before the General Assembly. Our Board of Directors, Board of Governors and committee engagement assist in promulgating rules and regulations stemming from the various federal, state and local agencies that oversee business activity.We are proud to be leaders on the policy front. Recent achievements include:

Reducing workers compensation rates by 33% over three years

Partnering with the Delaware Business Roundtable on an economic study focusing on the state’s long-term economic future

We also help our members forge new business relationships through networking and other social events meant to create an environment where businesses thrive in Delaware.The DSCC is a nonprofit organization. We depend on the support of our members to accomplish our mission. We partner with other advocacy groups and serve as the leading voice of the business community. Our leadership helps create jobs, promote business and improve the quality of life for all Delawareans.Your membership dollars and your support through programs like the Annual Dinner, Superstars in Education, Superstars in Business and our Legislative Brunches allow the State Chamber to be your dedicated voice in Dover.We are proud to advocate on your behalf addressing the challenges of today and exploring the opportunities of tomorrow.

This weekend the News Journal reported on a lawsuit brought by Belgian scientists whose stock in their company was escheated ultimately to Delaware resulting in a $12 million dollar loss for each. This is the latest in a series of lawsuits brought against the State of Delaware involving how abandoned property is collected and treated, and follows in a long line of cautions the State Chamber has relayed to the Department of Finance and the Secretary of State’s office.

At issue here is how property, in this case stocks, are classified as abandoned. If an account holder does not make contact with their financial institution every three years, the assets can be considered abandoned and reported to the State for collection. Again, in this case, it appears that the account holders were holding onto the stock long-term, and would have automatically benefited from their company’s merger with Merck, which would have borne a significant financial boon to the pair. Instead, the State paid them the market value of the stock at the time of escheat, which was significantly less than the future value they would have seen. The lawsuit brought against the State claims that the escheating of funds such as these is unconstitutional under both state and federal law.

As of now, abandoned property represents approximately $550 million, or 14% of Delaware’s operating budget. Its continued existence faces an uncertain future in light of the mounting litigation against the State of Delaware, with no ready alternative poised to take its place should the program be deemed unconstitutional.

In the aftermath of last year’s failed measure to raise the gas tax to help fund infrastructure projects, the goal this year was for the General Assembly to find $50 million to dedicate to infrastructure funding, with Governor Markell pledging to borrow another $50 million. After spending months negotiating on how to come up with the required money, the General Assembly passed legislation that will raise just under $24 million by increasing a number of DMV fees as well as the document fee associated with new car sales. In addition, $5 million of DOT operating expenses was transferred out of the Transportation Trust Fund responsible for funding infrastructure projects. As part of the negotiated deal, the money will be placed into a “lock box” dedicated for spending on transportation, the threshold for prevailing wage projects was raised, and prevailing wage will not be applied to the $20 million allocated to municipal street aid and the Community Transportation Fund, both of which fund local transportation improvements, such as filling potholes. The State Chamber expressed early support for all three add-ons, and lobbied diligently in support of a larger overall package that would have raised the goal of $50 million, and we hope that further action is taken in 2016 to help overcome the expected $780 million in anticipated shortfall over the next six years in much needed infrastructure projects.

In 1991, due to the recession, the General Assembly moved a portion of DELDOT operating expenses out of the General Fund and into the Transportation Trust Fund in order to balance the budget without resorting to a tax increase. Over the intervening years, with increases in salaries, retirements, health care expenses and other costs continually rising, the ratio of operating expenses to actual money used to fund projects has increased dramatically, resulting in an estimated $780 million shortfall over the next 6 years for transportation projects. The General Assembly took the first step of transferring $5 million of operating expenses back into the General Fund, and has indicated the goal of both continuing the process, and increasing the amount transferred, in future years.

Abandoned property

Two bills were passed related to how Delaware collects abandoned property, also known as escheat. Currently representing 14% of the state’s operating budget, this $500+ million revenue stream has come under fire from the business community at large over the last few years, resulting in a taskforce that met over the summer and came up with many of the proposals that were contained in these bills. They include limiting the total number of audits any one outside contractor can be assigned and requires all contracts with such contract auditors to assure that they will not employ or compensate senior officials from the Department of Finance involved with their work for two years after such officials leave state employment. It also directs the Secretary of Finance to prepare and promulgate a detailed manual containing procedural guidelines for the conduct of Delaware unclaimed property examinations and to update its regulations accordingly. The second bill shortens significantly the “look back” period from 1981 to 1991, and going forward will be a rolling 22 year “look back” starting in 2017. The bill also changes how companies can be audited, specifying they must first be offered the opportunity to enter a Voluntary Disclosure Agreement program. The State Chamber was involved in the process from the outset, and is pleased to see sustentative modifications made to the program.

Studies on Revenues and Spending

The Delaware Economic and Financial Advisory Council (DEFAC) was directed by Executive Order to create a taskforce charged with reviewing Delaware’s revenue streams and how to plan for the future. The taskforce issued a lengthy report outlining ways in which to increase revenues to keep up with state spending. During the process, it was lamented that no similar taskforce was created to review state expenditures, and a concession was made by budget writers this year to have Pew Charitable Trusts study how and what the state spends money on in an effort to make government more efficient. That study should be completed in time for next year’s budget process.

Budget

As mentioned above the budget this year was a difficult process for the General Assembly to undertake, and ultimately did little to plan for the next fiscal year. The State Chamber was disappointed that one-time monies stemming from bank mortgage settlements were used to fill budget gaps, that there was no requirement that state employees contribute more to their health insurance costs, and that no serious review of overall state spending was undertaken this year. The State Chamber will continue to review areas in which the state can be more effective and efficient when creating its budget.

No change to the Estate Tax

The Chamber has called for the elimination of the Estate Tax, but no action was taken this year. A disincentive to retirees, as well as a costly and inefficient program, the state has not seen the tax perform as a revenue stream in any meaningful way, and it puts Delaware at a competitive disadvantage to states like Florida.

Minimum Wage

A bill expected to be introduced next year will call for an increase in the minimum wage. This comes on the heels of a taskforce created to study low wage workers and the impact an increase in the minimum wage would have on the economy, on workers and on businesses. With impacts being felt in cities like Seattle and Los Angeles, both of which saw dramatic increases in minimum wages—up to $15 an hour, the General Assembly should look to those examples as a cautionary tale before considering a mandated wage hike, and instead look to how businesses like Walmart and Target have already raised their minimum wages to above the Federal level as the economy has improved.

Adjustments to PIT, Corporate Franchise Tax and Gross Receipts Tax

Already on the table is a proposal to add two top tiers of personal income tax levels as well as a proposal to increase corporate franchise tax thresholds. These come on top of earlier proposals to cut corporate income tax rates, and increase the Gross receipts tax. The State Chamber is on record urging the General Assembly not to simply raise taxes to close budget holes, but to focus first and foremost on areas in state government that can be trimmed or eliminated.